This SPAC Took a Different Track Which May Open Doors for Others

Financial Services
4 min read

Image Credit: Michael McKibben

SPACs and Potential Sellers are Successfully Thinking Outside the Box


A new Special Purpose Acquisition Company arrangement may open the door to more successful SPAC mergers. The deal, once completed, involves a pharmaceutical company spinning off a division, which will then be acquired by the SPAC. There are several positive aspects for the shareholders of the original company, including tax breaks, as the SPAC, which went
in August of 2021, successfully merges with an attractive target.

The Deal

Ligand Pharmaceuticals (LGND) announced Wednesday (March 23) the spinoff of its antibody discovery technology division, OmniAb. It also announced the business would immediately merge with the Avista Public Acquisition Corp. II (AHPA). The deal values OmniAb at about $1.1 billion and would provide up to $266 million in cash to the new company. The stock of both companies responded to the announcement positively and outperformed the related market indices. Avista/AHPA will provide at least $115 million of gross cash to the combined company through a $15 million PIPE investment and a $100 million facility to backstop potential redemptions. Ligand’s $15 million contribution to OmniAb will be made irrespective of the number of redemptions or the Avista contributions.

Ligand intends to distribute 100% of the equity in OmniAb to Ligand shareholders immediately prior to the business combination with APAC. The transaction will be effected through a “Reverse Morris Trust” transaction pursuant to which OmniAb will be spun-off to Ligand’s shareholders and simultaneously merged as a subsidiary of AHPA. The transaction is expected to be tax-free to Ligand and its shareholders for U.S. federal income tax purposes, except for cash received in lieu of fractional shares. Once the transaction has closed, Ligand shareholders are expected to own approximately 75% to 84% of the combined company, depending on redemptions. It will then be Nasdaq listed under the ticker symbol “OABI”.


is Reverse Morris Trust?

The Reverse Morris Trust is a form of tax-avoidance employed by companies. This tactic enables the company to sell off unwanted assets without incurring tax obligations on gains arising from the sale of these assets.

The Reverse Morris Trust technique works in the following manner: a parent company spins off a subsidiary to which it transfers the unwanted assets; a new, unrelated company is formed by a merger of the subsidiary with a third party company; the new company issues at least 50.1% of its voting stock (and thus, control) to the shareholders of the original parent company.

                       Source: Corporate
Finance Institute


Why it May Open More SPAC M&A Doors

SPAC IPOs ran at a historically high pace at the end of 2020, and the beginning of 2021. The pace seemed to have run ahead of the availability of well-suited merger targets – there just have not been enough viable companies with the desire to be acquired. Most SPACs force a merger deal to be in place within 24 months or the SPAC fails, and the remaining funds are returned to the investors. The largest risk to the investors is usually seen as opportunity cost of their cash. The risk to the SPAC’s management is that finding a suitable deal is challenging.

The nature of this pharmaceutical company deal, spin-off, Reverse Morris Trust, then merger, may inspire both potential targets and potential acquirers to think differently and shop with a newly expanded list.


Tax Benefits

The spin-off and acquisition is being done through a Reverse Morris Trust. Ligand benefits by saving taxes compared to selling Instead of selling an asset outright and generating a gain on sale, the asset is spun off, and then merged with a company interested in owning the asset. The shareholders of the spinoff, for tax reasons, have to end up with the majority of the merger partner’s stock. This means the spun-off asset is, essentially, the larger party, which is why the structure exists.

More Targets?

SPACs widening their sites merging with spun-off divisions provides more opportunities for them to find the ideal and willing merger candidate. Companies looking to sell productive departments may also find that negotiating with potential acquirers that include Special Purpose Acquisition Companies, could benefit all involved.


Paul Hoffman

Managing Editor, Channelchek


Suggested Reading

SPACs, Equity Research, and Bowling

SPAC Supply Provides Rare Opportunity

What Happens if Your SPAC Doesn’t Find its Ideal Acquisition?

Merger of a SPAC, the De-SPAC Phase Explained




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